Europe wide, we enjoy a competitive electricity market. This means that different providers are at liberty to compete on price and service with other businesses in the sector, to give us a choice over who we end up buying our electricity from. While this is a good thing, the market is constantly under pressure to lower its carbon emissions, which means more cost to our suppliers, which is inevitably going to filter down to us, the consumer.
In order to minimise the impact on the consumer, while still providing significant leverage on the energy suppliers, the EU currently imposes carbon pricing, where suppliers are taxed or fined a set amount based on how carbon intensive their energy production processes are. Believe it or not, energy suppliers are actually very keen to de-carbonise their generation processes, but so far they are finding that the EU system is not providing what they need in terms of financial support.
What do suppliers need to do?
In the energy sector, current agreements ask suppliers to reduce their carbon emissions from an average of 411kg per kWh down to 63kg per kWh by the year 2040 (1). However, current indications are that, despite efforts to change the mix radically, the electricity mix is still dominated by fossil fuels, with them making up around 47.9 per cent of our electricity generation fuel today (2).
So what’s the problem?
Reforms are already happening, and mostly from grass roots upwards, with no motivation from the powers that be to really speak of. Renewables are accelerating in growth naturally, as suppliers fight to meet their carbon reduction targets, and demand is slowing and even stagnating, as consumers learn the benefits of energy efficiency in their own home.
However, there is another, more concerning influencing factor at play here. The current wholesale electricity prices in Europe are low and still declining (3). The current system of carbon taxation to make investments more profitable will only continue to work if the companies involved stay profitable themselves. Because prices are changing in the wholesale market, the capital for investment in low carbon technology is just not there.
What do the suppliers think?
As electricity prices start to plummet, so too do the valuations of our ‘big six’ energy suppliers here in the UK. German based E.On, despite profits in its UK domestic energy arm (4), have had a tough time overall. The reduction in wholesale electricity costs have seen them forced to write down the value of their power plants, and to post its biggest quarterly loss in the months ending September 30th 2015 (5).
Their Chief Financial Officer, Michael Sen, commented in an interview:
“Half a year ago, the world looked different. The underlying conditions have worsened dramatically… This has unavoidably reduced the opportunities to earn money.”
He alluded to the closing of E.On’s power plants as a mitigating measure too:
“If power plants fail to make money for a sustained period of time, we must and will act,” Sen said.
One of the UK’s largest energy suppliers, EDF, have publically called for a radical and rapid reform to the structure of the electricity market in Europe in order to allow for new investments in future generating capacity.
Their Chairman and CEO, Jean-Bernard Lévy, attended a recent EU Energy Summit, where all the major players from the European energy suppliers were present to discuss current markets and the possibility of reform. He personally stressed the need for a ground-breaking reform of the electricity market in Europe, in particular:
To establish a workable price floor for CO2, which will encourage investment in new generation facilities and in non-fossil fuels in particular. Their estimates calculated that this would be achieved with a price of around €30 to €40 per tonne of CO2.
To promote a mechanism for energy generation capacity, which would give Europe the security of supply it needs in a time of market turbulence(6).
Electricity market reforms in Europe are certainly on the minds and in the mouths of many of our continents great decision makers. What comes out of these discussions remain to be seen, but it is hoped that any reforms that are implemented over the next few years will be beneficial not only to our suppliers and our own personal bills, but also to our planet and to the future of our health and sustainability as a species.
